Q3 2017 Grupo Aval Acciones y Valores SA Earnings Call

Nov 28, 2017 AM EST
GRUPOAVAL.BG - Grupo Aval Acciones y Valores SA
Q3 2017 Grupo Aval Acciones y Valores SA Earnings Call
Nov 28, 2017 / 02:00PM GMT 

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Corporate Participants
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   *  Diego Fernando Solano Saravia
      Grupo Aval Acciones Y Valores S.A. - CFO
   *  Luis Carlos Sarmiento Gutiérrez
      Grupo Aval Acciones Y Valores S.A. - President

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Conference Call Participants
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   *  Cristina Manotas
   *  Gabriel Nobrega
   *  Jason Barrett Mollin
      Scotiabank Global Banking and Markets, Research Division - MD of LatAm Financial Services
   *  Nicolas Riva
      Citigroup Inc, Research Division - Senior Associate
   *  Sebastián Gallego
      CrediCorp Capital, Research Division - Analyst of Oil and Gas

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Presentation
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Operator   [1]
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 Ladies and gentlemen, welcome to Grupo Aval Third Quarter 2017 Conference Call, under full IFRS. My name is Jason, and I will be your operator for today's call. (Operator Instructions) I will now turn the call over to Mr. Luis Carlos Sarmiento Gutiérrez, President and CEO of Grupo Aval. Mr. Sarmiento, you may begin.

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 Luis Carlos Sarmiento Gutiérrez,  Grupo Aval Acciones Y Valores S.A. - President   [2]
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 Good morning, Jason, and thank you. And good morning all, and thank you very much for joining our 2017 third quarter results call. Allow me to start by providing an update in reference to 2 recurring items in the agendas of our quarterly calls: Ruta del Sol and Electricaribe, and then I will also refer to our exposure to SITP. Regarding Concesionaria Ruta del Sol 2, CRDS, first, I will briefly recap where we left this tortured story during our last quarterly call. As you may recall, I was excited to report that the creditor banks were close to receiving a first partial payment at CRDS had just about fulfilled their 2 required obligations for that payment to be effected, stipulated under the agreement signed with DIAN on February 22 and modified on March 27 of this year. I did also mention that in the August 3 arbitration proceeding, where we had expected to settle with DIAN to receive the arbitrator's ratification of the concession liquidation formula, established under the terms of the agreement, DIAN stated its unwillingness to abide by the formula they had agreed to in the binding document. DIAN has since taken this stance to a new level and has proceeded to ignore the rest of its obligation under the agreement, including the obligation to effect the mentioned first payment. The arbitration tribunal, which was expected to meet again on September 1, has failed to reconvene since due to several postponements. In contrast, with the lack of progress in the arbitration tribunal, there has been significant movement on two other fronts: first, in the administrative state court, which is handling the class action suit to which I have referred in the past; and secondly, in Congress. A couple of days after our last call, the state court ordered CRDS to present to DIAN an updated detailed inventory of its -- of all its liabilities, including its financial obligations as of October 31, and also ordered DIAN to review this information, and at most, 20 labor days later, to use the almost $500 million already allocated to pay for Ruta del Sol to start paying these obligations. CRDS complied with the court's order. DIAN reviewed the information sent by the company and followed up with a couple of additional information requests, which have been answered. Therefore, in our estimate, DIAN now has until approximately December 11 to comply with its own court-mandated obligation. So it looks as though the banks will receive a first substantial payment, not as a result of the termination agreement, but instead, as a result of a court order. Additionally, just last week, both chambers of Congress approved a modification of Article 32 of the 2012 law, 1508, also known as the infrastructure law, as a result of which specific language was inserted into the law that specifies how to liquidate concessions-declared null after events similar to those that terminated the CRDS concession. In our opinion, the liquidation formula inserted in the modified law serves thoroughly to calculate the liquidation value of our concession-declared null and thus terminated. If DIAN abides by the state court order and by the mentioned modification of the law, the financial system will soon receive the long-awaited first payment, and the sponsors will have a definite -- a definitive liquidation value and a timeline to receive such payments. With regard to Electricaribe, I mentioned during our last call that both the government and the financial system had agreed to work on a solution to financially save the company and to eventually pay the company's debt to the financial system. The banks and the government through the Financiera de Desarrollo Nacional, the FDN, hired investment banks to come up with possible solutions. We were recently told that the FDN is ready to meet to discuss their findings and to share the findings of the banks. In the meantime, Gas Natural from Spain, the majority owner of Electricaribe, has expressed its willingness to sit down with the government to explore ways in which they can take back the company. Gas Natural is confident that with some regulatory and legal adjustments, Electricaribe is salvageable. We still believe that this is a long-term possibility at best, and therefore, we have continued to book loan loss provisions to cover our exposure. I had mentioned that we would constitute provision for 70% of our $200 million exposure during 2017, and I can now report that as of today's call, we are almost there. We have also started to make provisions for our exposure to certain companies associated with Bogotá's mass transportation system, SITP. Our total exposure to these companies is approximately $160 million and as of September 30, we have constituted provisions for approximately 13% of such exposure. By year-end, we expect to have both the accumulated provisions equivalent to 16% of our exposure and our current plan is to bring provisions up to 50% of our exposure during 2018. As this is an essential service to Bogotá, we remain very attentive to the mayor's handling of the situation. We are fairly confident that sooner than later, the creditor banks will be called to participate in a series of Bogotá-sponsored refinancing of this debt. This refinancing will probably entail a long-term solution as well. We will revisit these problem-credit situations during our next call. Regarding the current macroeconomic environment, although it is way too early to point to a definitive trend towards an acceleration of growth, it is probably a safe bet to declare that the worst of the deceleration is behind us. In fact, there are a few macroeconomic indicators that would seem to point in that direction. To start with, inflation numbers have been surprisingly low during 2017, and just recently broke the 4% barrier on a last 12-month basis. It might just be that inflation for 2017 will come in at approximately this same 4% number. Not long ago, we should remember that inflation on a 12-month basis had risen above 9%. The Central Banks lived up to its mandate and fought hard against losing control of this index through the application of contractionary policy, which drove rates up to a high of 7.75% almost at the end of 2016, and once the inflation trend started to ease, so did the bank's monetary policy, which has decreased its rate by 300 basis points since its highest level last year. The Central Bank's monetary policy, should in the medium-term, help with consumer delinquencies as rates drop and prices of consumer goods hold. We do not see much more room for easing, but nevertheless, we expect that 2018's inflation will come in closer to 3.5%. Another contributing factor to a controlled inflation number is oil exports, which have diminished as a percentage of total exports from 50% in 2014 to 33% in 2017. This has helped to diminish the volatility of the peso-dollar exchange rate, and therefore, has made the price of imports more stable. The reduced volatility in the price of imports has also contributed to keep prices down, and thus, inflation. To close this loop, imports have also grown in 2017 at a much lesser rate than exports. In fact, as of August 2017, exports had grown by almost 20%, while the imports grew 5.7%. Consequently, Colombia's trade deficit has also taken a turn in the right direction. We expect this indicator to end this year at 3.8% and further correct to 3.5% during 2018. The country's fiscal deficit has slowly started to turn in the right direction, and for this year, we expect it to come in at around 3.6%. However, we insist that the fiscal rule should be examined to avoid setting the country on a chase of unattainable fiscal deficit objective that might deviate attention from Colombia's most pressing growth goals. Just recently, 3 rating agencies expressed that a modification of the fiscal rule would not be credit negative for the country. This is just food for thought though. In any case, the country's growth in the third quarter was 2% after observed growth of 1.2% in the second quarter and 1.3% in 2017's first quarter. Taking into account that the last quarter of 2016 grew at 1.6%, we should see better growth during this year's last quarter for the total growth during 2017 of approximately 1.7%. Next year, we expect to see growth closer to between 2.4% and 2.5%. However, to achieve this better growth, we believe that 4G infrastructure projects must get underway in earnest as well as those projects' finance. We hope that the resolution of Ruta del Sol's liquidation will be the trigger to this necessary component of next year's growth strategy. In the meantime, our very own Corficolombiana's lackluster results for this year have been largely affected by this slow start in its own 4G infrastructure projects. We remain concerned with unemployment, and specifically, urban unemployment.

 This indicator continues to be our main worry as it relates to the health of our consumer loan portfolios, and is a major reason why we have made an effort to safeguard the quality of our loan portfolios in lieu of growth. This strategy has probably resulted in slower growth in our peers, but in our opinion, has proven right. Evidence of its success is observable upon confirmed equality of the loan portfolios of our banks versus the rest of the financial system. During this third year -- this year's third quarter, our pension fund manager, Porvenir, also continued to perform very favorably supported in, one the increasing new funds coming into its system, and secondly, by the high returns of its assets under management. Our Central American operation, which is 30% of our business now, continues to perform strongly. Growth seen in BAC's loan book in dollars is greater than the growth of our Colombia loan portfolios. Cost of risk is controlled despite some events in Costa Rica and Panama. Efficiency is improving and ROE is sustained. As we have said before, BAC continues to be an integral part of our strategy as it has proven to be an excellent investment for Grupo Aval and a great source of diversification. Now turning to Aval's financial results, I will briefly run over the main highlights and then pass this over to Diego who would refer in detail to our business results. Partly as a result of our strategy and partly due to the slow economy on a consolidated basis, during the third quarter, our total loans declined 0.2% versus the second quarter of 2017, which is a 0.9% increase in absence of the impact of the close to 4% revaluation of the currency during the period. In the last 12 months, our consolidated loan book grew by 7.9%, which is 7.3% in absence of FX movements. Our 30-day PDLs or our 90-day NPLs deteriorated by approximately 20 basis points in the quarter to 4% and 2.7% respectively. A positive element in this quarter is that our consumer portfolio quality improved 10 basis points versus the previous quarter. This is clearly differentiating us versus our peers as their indicators continue to slow -- to show deterioration while they continue to grow faster than we do. A second positive element is that the PDL formation continues to show a positive trend. Cost of risk for the quarter, net of recoveries was 2.6% versus 2.7% in the previous quarter, including a COP 150 billion provision expense related to Electricaribe, which is COP 108 billion during the second quarter. Electricaribe accounted for 40 basis points of the cost of risk during the quarter. In sync with the slow economy, total deposits declined by 2.2% in the quarter, which is minus 1.1% excluding the impact of FX movements in our Central American operation in the last 12 months. In the last 12 months, deposits grew by 7.9%, which is 7.3% excluding FX movements. Partly, as a consequence of the continued growth slow down and partly as a consequence of the FX revaluation of the period, the third quarter was one in which are consolidated equity ratios improved. Our total equity to total asset ratio improved from 10.7% in June 2017 to 11% in September 2017, and our tangible capital ratio improved from 7.6% to 8%. On a positive note, improving our net asset sensitiveness, despite continuing to see a steep decline in interest rate environment, our NIM only declined by approximately 15 basis points to 5.9% during the quarter. During 2017, NIM resilience has offset to some extent the increase in the provision expense and thus is limited the negative impact of the increase in the cost of risk in the ROE. Decline in interest rates are expected to continue as well as NIMs, but we expect that our cost of risk will also decline setting up ourselves for a stronger ROE in 2018. Our consolidated NIM and loans remains constant at 7% during the quarter and our consolidated NIM on total investments had a mediocre performance with the ratio of 0.3% versus 1.4% in the previous quarter. Our gross fee income grew by 1% in the quarter when compared to the second quarter of 2017. This performance continues to surpass the growth of our balance sheet. Our other operating income for the period was COP 525.2 billion for the quarter versus COP 493.1 billion in the previous quarter, supported by a better performance of our nonfinancial sector. Our consolidated efficiency ratio showed a slight improvement when measured as cost to income. 46.8% in the third quarter versus 46.9% during this year's second quarter. Our implicit tax rate was 40.3%, which compares negatively versus 35.6% during the previous quarter. There are several reasons for this, including the generation of more taxable income and because during this quarter, we did not book as many tax recoveries as we had during the first semester of this year. In conclusion, due principally to specific credit exposures to problem clients such as Electricaribe and SITP, to slow growth, to the slow start of 4G infrastructure projects and to the tax rate, which were partially offset by comparatively better loan portfolio quality and healthy growth in fee income, net income for the quarter was COP 437.9 billion or COP 20 per share compared to COP 470.8 billion in the second quarter of this year. I now pass on the presentation to Diego, who will expand on the highlights that I just shared with you. Thank you, and have a good day.

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 Diego Fernando Solano Saravia,  Grupo Aval Acciones Y Valores S.A. - CFO   [3]
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 Thank you, Luis Carlos. I will now move to the consolidated results of Grupo Aval under IFRS starting on Page 9 with our asset evolution. As mentioned by Luis Carlos, growth was low during the quarter consistent with the poor GDP cycle. In absence of the effect of a Colombian Peso fluctuations in Central America, as it were stable during the quarter and grew 4.8% during the last 12 months. In Peso terms, total assets decreased by 1.2% during this quarter and increased 5.4% over the last 12 months. Asset dynamics, excluding FX during the quarter resulted from a 0.9% or COP 1.4 trillion increase in gross loans and a 2% or COP 0.5 trillion increase in total financial assets held for investments. These were offset by a 21.5% or COP 1.3 trillion decrease in interbank and overnight funds, mainly in Colombia, and a 3.6% or COP 0.8 trillion decrease in cash, mainly in Central America. Over the quarter, our Colombian assets slightly increased 0.5% during the quarter, while our Central American assets grew at 0.9% in dollar terms, a 2.9% decrease when translated into Colombian Pesos. As mentioned before, reductions in the interbank and overnight funds, particularly in Banco Bogotá and [ROAE] determine the growth dynamics of our assets in Colombia. Over the 12-months period ended on September, our Colombian assets increased 3.8% while our Central American assets grew 7.5% in dollar terms, a 9.6% increase when translated into Colombian Pesos. Consolidated balance sheet structure remained substantially stable. Net loans and fixed income investments accounted for 68% and 9.6% of total assets respectively at end of this period. Given the 3.7% appreciation of the Colombian Peso during the quarter, our Colombian operation slightly increased its share of assets by 51 basis points to 71.2%. On page 10, we present our loan portfolio of evolution. As mentioned in our recent calls, the slow economic cycle has driven the modest loan growth experienced throughout this year. Loan growth resulted from a soft loan demand of our Colombian corporate customers and tighter consumer and SME underwriting practices throughout our operation. Considering the economic slowdown, our banks were -- have emphasized products and segments with lower risk profiles. In the retail front, we have been prioritizing mainly on payroll loans and cross-selling our personal loans and credit cards to existing customers. Mortgages continue to be a source of growth in Colombia, given our still low market share. Gross loans increased 7.9% during the last 12 months and contracted 0.2% during the quarter. In absence of the effect of the Peso appreciation in our Central American operation, 12-months and 3-months growths would have been 7.3% and 0.9% respectively. Colombia accounted for 71.6% of gross loan book. Colombian loans grew at 6.7% over the 12-month period and 0.3% during the quarter. Colombian consumer and mortgage loans continued to grow stronger than corporate loans expanding 2% and 4% respectively over the quarter. This growth was partially offset by a 0.8% contraction of the corporate loan portfolio, mainly in the food, beverage and tobacco industry, construction and transportation and communication. Central America continues to be a more dynamic than Colombia, growing at 8.7% in dollar terms over the 12-month period. 10.9% when translated into Colombian Pesos, and 2.4% in dollar terms during the quarter, a 1.4% contraction when translated into Colombian Pesos. Quarterly growth was led by growth in Costa Rica, Panama and Honduras where loans expanded over 3%. Growth in the region was stronger in public services, which grew at 13.6%, construction, which grew at 25%, and transportation and communication, which grew at 6.3%. Broken down by type of loan over the last 12 months, mortgages grew 16.2% in Colombia and 5% in dollar terms in Central America. Consumer loans grew 8.6% in Colombia and 8.3% in dollar terms in Central America. Commercial loans grew 5.2% in Colombia and 11.1% in dollar terms in Central America. The structure of our gross loan portfolio continues to shift slightly towards loans to individuals. Loans to individuals, which includes consumer mortgages and microcredit loans, weighted 41.6% at end of period. It is 0.6 percentage points and 0.3 percentage points more than 12 months and 3 months earlier, respectively. We expect 2017 loan growth in absence of FX movements to be in the 6.7% area in 2017, and 9% to 10% area for 2018. On page 11, we present several loan portfolio quality ratios. During this quarter,

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 that we had reported during the previous quarters cost, keeping that the cycle might be reverting soon. This improvement in performance of the consumer portfolio resulted in a slight decrease in our cost of risk, in spite of an increase in provisions in our Electricaribe exposure. It is worth pointing out that consistent with what we have experienced in previous credit-quality cycles, our Colombian portfolio has performed better than the rest of the market. Year-to-date, our Colombian and consolidated consumer PDLs have deteriorated 87 basis points to 5.6% of our Colombian gross loans. This compares well to the rest of the Colombian market, where PDLs have deteriorated 182 basis points to 7.6%. Our better-than-market performance is mainly explained by a higher weight of our payroll loans in our mix and a more conservative underwriting of consumer loans along 2017. Starting on the top left of the page, you will find the evolution of our loans past due more than 30 days, and of our NPLs, both as a percentage of total loans including interest account receivables. During this quarter, our delinquency ratios measured as 30-days PDLs to total loans increased by 23 basis points to 4%. Delinquency measured as NPLs to total loans deteriorated by 22 basis points to 2.7%. Moving to the right, annualized net provision expense, net of recoveries of charged-off assets for the quarter was 2.6% of average loans, showing a 10 basis points improvement as compared to the last quarter. Even though it's still high relative to our historic performance, this result is a slight improvement down from 2.7% recorded 3 months earlier. The Electricaribe and SITP impairments for the period accounted for 47 basis points of the quarter -- quarter's cost of risk, 40 basis points Electricaribe and 7 basis points SITP. This is 17 basis points more than the 30 basis points consumed a quarter earlier, 28 basis points for Electricaribe and 2 basis points for SITP. High cost of risk of the consumer portfolio have been mainly driven by higher than historic impairment losses in credit cards in both regions and in personal and auto loans in Colombia. Impairment of consumer portfolio explained 15 basis points of improvement in total cost of risk during the quarter. Of those, 9 basis points are explained by Colombia and 6 basis points by Central America. In Colombia, the improvement was led by a reduction in cost of risk of credit cards and auto loans. Bottom left represents the annualized ratio of charge-offs as a share of average NPLs. This ratio continues at 0.7x.

 Finally, on bottom right, you will see several loan loss reserve coverage ratios. Our allowance is worth 3.4% of our total loans and cover 1.2x our NPLs and 0.8x our 30-days PDLs. We expect 2017 cost of risk net of recoveries to be in the 2.4% area. We foresee an improvement to 2.25% area for the next year, as the consumer credit cycle starts to revert and a lower impact of large exposures such as Electricaribe. These are figures under IAS 39, guidance on the impact under IFRS 9 will be included in our year-end report. On page 12, you will find further detail on the quality of our loan portfolio. As mentioned on previous page, our overall end-of-period delinquency ratio measured as 30-days PDLs to total loans increased by 23 basis points to 4.0%. Deterioration was driven mainly by the commercial portfolio during the quarter. The right delinquency measured as NPLs to total loans deteriorated 22 basis points to 2.7%, broken down by type of loan quarter-on-quarter. Commercial loans experienced a 40 basis points deterioration to 3.4% when measured as 30 days PDLs. Colombia deteriorated 47 basis points to 4%, while Central America deteriorated 10 basis points to 1%. Delinquency measured as NPLs to total loans deteriorated 35 basis points to 2.8%.

 In Colombia, we evidenced a deterioration coming mainly from middle market and SME customers. Consumer loans experienced a 10 basis points improvement to 5.1% when measured as 30-days PDLs and remained stable when measured as NPLs. Mortgage loans deteriorated 19 basis points to 3.7% when measured as 30-days PDLs and 9 basis points to 2% when measured based on NPLs. Bottom of the page we present PDL evolution. Commercial loans were the main driver of PDL formation during the quarter, adding COP 437 billion, COP 181 billion more than a quarter earlier. However, consumer loan PDL formation receded COP 177 billion to COP 572 billion, mainly driven by credit cards and personal loans. On page 13, we present funding and deposit evolution. Our funding structure was substantially stable with deposits representing slightly more than 76% of total funding and our CASA ratio over 57% of our deposits. Liquidity measured as cash to deposits was close to 15%. This slight decrease is explained by a reduction in excess cash positions in Central America that we built earlier during the year as a reaction to the downgrade of El Salvador during the first quarter of this year. Over the 12-month period, deposits have evolved in line with loans, maintaining the deposit-to-loan ratio at 95%. Total funding grew 6.2% over the last 12 months and decreased by 1.5% during the quarter. Deposits increased 7.9% over the last 12 months and decreased 2.2% during the last quarter. In absence of the effect of the Colombian Peso exchange rate fluctuations on Central America, 12-month and 3-month total funding growth would have been 5.7% and minus 0.5% respectively, while 12-month and 3-month deposit growths would have been 7.3% and 1.1% contraction, respectively. Colombia accounted for 72.5% of the total funding and 71.8% of total deposits. Funding in Colombia grew 5.1% over the last 12 months and decreased 0.8% during the quarter, while deposits grew 6% over the last 12 months and decreased 1.8% during the quarter. A contraction during the quarter was driven by Banco de Bogotá, which reduced its time deposits by 5.8% while maintaining a healthy deposit to net loan ratio of 99%. Central American funding grew 7.3% over 12 months in dollar terms or 9.4% in Colombian Peso terms, an increase over the last quarter by 0.4% in dollar terms, 3.4% decrease in Colombian Peso terms. Deposits grew 10.8% in dollar terms or 12.9% in Colombian Peso terms over the last 12 months and increased 0.8% in dollar terms, a 3% decrease in Colombian Peso terms during the quarter. Lower deposit growth in Central America resulted from an adjustment in liquidity described earlier. We expect deposits for 2017 and 2018 to grow slightly below loans. On page 14, we present the evolution of our total capitalization, our attributable shareholder's equity and the capital adequacy ratio of our banks. Our total equity, defined as attributable equity plus minority interest, was COP 25.2 trillion as of the end of the third quarter of 2017. This implies a 5.9% over the last 12 months and a 1.9% increase during the last quarter. Attributable equity accounted for 63.1% of total equity as of September 2017 and was COP 15.9 trillion as of the end of this period, increasing 4.9% during the last 12 months and 2.4% during the last quarter, mainly earnings generating during this quarter explained equity growth during the period. Consolidated solvencies at the end of period were 14% for y Banco de Bogotá, 12.7% for Banco de Occidente, 10.9% for Banco Popular and 12.4% for Banco AV Villas. Tier 1 end-of-period ratios ranged from 9.1% for Banco de Bogotá to 11.1%. All of our banks show a profit Tier 1 and total solvency ratios. Starting on page 15, we present the evolution of net interest margin. As mentioned in the past, even though minor, our nonfinancial sector activities have some impact on our net interest margin ratio. For the benefit of comparison with other financial institutions, we provide on this page information and the relevance of our nonfinancial sector activities in our operation. Financial sector activities contribute with almost all of our interest-earning assets. Financial sector entities account for close to 99% of our interest-earning assets. Promigas' operation contributes most of the interest-earning assets from the nonfinancial sector. These assets are mainly items that were incorporated late last year that are considered financial leases provided by the company under IFRS. Even though like in our mix, funding associated with our nonfinancial activities and HoldCo account for 5.2% of total funding and 8% of total interest expense. In general, the nonfinancial sector carry higher cost of funds than those of our financial operation given their longer maturities and high-risk premiums. The total weight of our nonfinancial operation reduced our net interest margin in 21 basis points. The share of our liabilities has remained relatively stable over the past 5 quarters, however, we expect it to grow over the coming years due to the impact of the financing of the upcoming fourth-generation concession infrastructure projects. Moving to page 16, we present our yield on loans, cost of funds and spreads. During this quarter, yield on loans and cost of funds fell at similar paces, leaving the spreads substantially stable at 7.2% and 10 basis points higher than 4 quarters earlier. The average consolidated yield on loans for this quarter was 11.3%, decreasing 61 basis points compared to the same period of 2016 and 27 basis points as compared to the previous quarter. Yield reduction was driven by our Colombian commercial portfolio. The yield of our customer portfolio remained basically stable during the quarter. Yield on commercial loans fell 48 basis points quarter-on-quarter to 8.8%, driven by a 64% -- a 64 basis points reduction in the yield of our Colombian commercial portfolio to 9.3%. The yield of our commercial portfolio in Colombia reflects the fluctuations of the Central Bank's intervention rate that an average has fallen 108 basis points during the quarter to 119 basis points compared to 4 quarters earlier. Our Colombian corporate loan portfolio, which accounts for 47% of total gross loans is over 90% floating rate and reprices with a few months lag to changes in the Central Bank intervention rate. The yield on consumer loans has been less sensitive to the Central Bank rate reductions given that a substantial part of this portfolio has a fixed rate and that the market has been less aggressive in bidding down the prices of those loans consistent with a higher delinquency ratios experienced over the past few quarters. The average yield of our consumer loan portfolio was 16.8% during the quarter. The average cost of fund of our consolidated operation was 4.1% during the quarter, 31 basis points lower than the 4.8% recorded a year earlier and 23 basis points below the 4.3% recorded a quarter earlier. These results from a 33 basis points improvement in the cost of funds in Colombia during the quarter and stability in Central America. Isolating the effect of the nonfinancial sector funding, the cost of funds for the financial sector of 4% decreased 70 basis points when compared to a year earlier and 26 basis points when compared to a quarter earlier. The cost of funds for the nonfinancial sector and holding company net of eliminations of 6.3% decreased by 85 basis points when compared to a year earlier and increased 26 basis points when compared to a quarter earlier. The sharp decline versus a year earlier is mainly attributable to the nonfinancial sector's liability, interest rate sensitivity to inflation and DTF. The quarterly increase is attributable to Grupo Aval's COP 400 billion bond issuance in Colombian -- in the Colombian market on June 28, fully impacting the quarter's PDL as compared to the last quarter. We believe that the favorable behavior of our spread on loans is mainly due to a temporary repricing gaps and incorporation of our high-risk premium on certain loans. We expect this environment to unwind as more -- a more dynamic economy brings higher growths and improvement in credit quality of consumer loans next year. On page 17, our net interest margin for the financial sector and Grupo Aval's consolidated operations is presented. Our quarterly net interest income was COP 2.7 trillion, showing a 10.7% increase when compared to the same quarter a year earlier, and an increase of 1.2% when compared to the previous quarter. Consolidated net interest margin on loans remains stable at 7% compared to the previous quarter an expanded 19 basis points compared to 4 quarters earlier. These resulted from the spread dynamics described on the previous chart. However, our NIM on investments contracted to 0.3%, 108 basis points short of that recorded a quarter earlier. This lower-than-average performance resulted from an upward shift in the yield curve, up 26 basis points, 13 basis points and 15 basis points in the 1-year, 5-year, and 10-year segments of the curve. As a result, the NIM of our consolidated operation, including the net trading income from investments, held for trading through the profit and loss decreased 14 basis points during the quarter from 6.1% to 5.9%. Our consolidated NIM increased 15 basis points when compared to a year earlier.

 Our NIM, excluding net trading income from investments held for trading for profit and loss was stable at 5.9%. Isolating the 21 basis points effect of the nonfinancial activities, our NIM of 6.1% was 12 basis points lower than that of the previous quarter and increased 7 basis points when compared to a year earlier. We expect full year 2017 NIM to be 20 basis points higher than that of 2016. This performance would revert 40 to 50 basis points during 2018, resulting from pricing into consumer loans, the reduction in Central Bank rate and lower cost of risk as well as higher share of loans priced under a lower interest rate environment. On page 18, we present fees and other income. Gross fee income grew 8.5% compared to the same period a year earlier, and 1% to the previous quarter. Fees grew by 8.1% and 0.2%, respectively, compared to those periods, when excluding the effect of FX movements ops in Central America. Growth was slightly stronger than that of our loan portfolio, and was driven by a transactional fees from banking services. Banking fees continued to account for close to 3/4 of our fee income, followed by pension and severance fund management that contributed to over 17% of our fee income. Broken by geography, Colombia accounted for 61% of total gross fees. Domestic fees grew 7.6% compared to the same quarter 12 months earlier, while Central American fees grew 9% in dollar terms, a 10% increase in Colombian Peso terms over the same period. The bottom of the page we present dollar income. Dollar income for the quarter was COP 525 billion. Other income increased by 6.5% during the quarter, driven by higher income from the nonfinancial sector mainly from our energy and gas companies. This result was 15.3% lower than 4 quarters earlier, affected by a lower contribution of our toll road concessions and construction explained by termination of Ruta del Sol loss.

 On page 19, we present efficiency ratios. Our cost-control initiatives have delivered positive results. Cumulative operational -- operating expenses as of September increased by 3.7% compared to the same 9 months a year earlier, or 6.8% when excluding the wealth tax. This result comes in spite of the low growth experienced throughout the year and the high labor union wage increase that resulted from high inflation that was prevailing during key months last year for setting union wage salaries at Banco de Bogotá. Our efficiency ratio measured as operating expenses to total income of 46.8% during the quarter, was slightly better than the 46.9% recorded 3 months earlier and 1 percentage point higher than that recorded 4 quarters before. In Colombia, this ratio improved by -- improved to 44.1%, down from 44.5% reported in the second quarter, and deteriorated when compared to the 42.1% reported 4 quarters earlier. It is worth mentioning that among other initiatives, Banco de Bogotá eliminated 400 positions in Colombia, generating onetime costs of approximately COP 16 billion. Absent of this one-time cost, quarterly efficiency would have been 50 basis points lower during the quarter. In Central America, this ratio improved to 52.5%, down from 53.7% a year earlier and deteriorated from 51.8% during the second quarter of 2017. Our efficiency measured as operating expense to average assets of 3.5% remained unchanged compared to the previous quarter, an increase from 3.4% in the third quarter of 2016. The Central American and Colombian operations recorded 4.4% and 3.1%, respectively, during this quarter. Compared to 4 quarters earlier, Central America improved 26 basis points from 4.7% while Colombia was up from the 2% then recorded. Both regions remained substantially stable compared to the previous quarter. Regarding efficiency ratio, we expect to maintain our current cost to assets for the full year 2017, and to improve 10 basis points for 2018. Finally, on page 20, we present our net income and profitability ratios. Attributable net income for the quarter was COP 438 billion or COP 19.7 per share, accumulated COP 1,496 billion or COP 67.1 per share year-to-date. Return on average assets and return on average equity for the quarter were 1.3% and 11.2%, respectively.

 Before we move to questions and answers, I will now summarize the general guidance for 2017 and 2018. We expect 2017 loan growth to be in the 6% to 7% area and 9% to 10% area in 2018. Deposit growth will be slightly below loan growth for both years. We expect 2017 cost of risk net of recoveries to be in the 2.4% area. We expect an improvement to 2.25% area for next year as the consumer credit cycle starts to revert. 2018 will still carry some burden from SITP and Electricaribe. These figures are under IAS 39 guidance on the impact of IFRS 9 will be disclosed later in our year-end report. We expect full year 2017 NIM to be 20 basis points higher than that of 2016. This performance will revert 40 to 50 basis points during 2018, resulting from the pricing into consumer loans, and of reductions in Central Bank rates and the lower cost of risk. We expect fee income to grow at a slightly faster pace than loan volume. Regarding efficiency ratio, we expect to maintain our current cost to assets for full year 2017 and improve 10 basis points in 2018. We expect our marginal tax rate to be in the 35% area in 2017 and 33% for 2018. Finally, we expect our 2017 ROE to be in the 12% area, ticking up to 13% in 2018. We now open it up for questions and answers.

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Questions and Answers
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Operator   [1]
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 [Operator Instructions] The first question is Gabriel Nobrega from UBS.

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 Gabriel Nobrega,    [2]
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 My question -- my first question is regarding your loan growth. We saw that it was growing close to 9% in this quarter, and I just want to understand what lines you are expecting to contribute to this contraction to reach your target of [6 to 7%] this year? And moreover, as we go into 2018, which signs do you expect to show a stronger growth? And my second question is regarding asset quality. We have seen NPL ratios increasing once again in this quarter, and I just want to get a bit more color of where you believe we are in the asset quality cycle? And what should we expect going into 2018?

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 Diego Fernando Solano Saravia,  Grupo Aval Acciones Y Valores S.A. - CFO   [3]
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 Okay. Thank you, Gabriel. Regarding loan growth, we expect to see some pick up from our corporate portfolio. We started to see some reaction that is in line with the seasonality that we usually have around the end of year cycle. As the process of -- or rather the cycle continues to improve on the consumer portfolio, we expect our willingness to lend in this segment to increase. This ties very much your second question and it is around where in the NPL cycle are we? The way to think about it is there's basically a sequence of events that needs to happen. You first need to see GDP starting to grow faster. What follows that, is an improvement in unemployment and you finally start to see a substantial recovery of consumer NPLs particularly. We have already started to see some pick up in the economy of around well moving up to 2%, up from a 1.2% and 1.3% that we saw during the first couple of quarters, and also a very slow quarter at year-end last year. On the unemployment front, signals are not yet that clear. However, we have started to see a pause in the deterioration of our consumer loan portfolio that hints that there could be something already happening in the economy. In that sense, we haven't changed our guidance for this year. We still -- even though we have already seen better performance of the economy during the third quarter, we haven't yet seen the improvement in unemployment that would give us more confidence to see recovery on consumers faster. The other thing that you need to take into consideration is that rates have lowered in a very substantial manner. This is very important, first, for the corporate companies where loans are floating. Therefore, the relief on their cost has already begun to happen from several months ago already. On the consumer front in the absence of rate reductions, rates for consumers should have gone up given the higher cost of risk that we have experienced. Part of the reason why this hasn't reacted faster than perhaps the Central Bank and some government officials would expect, is that we have to price in this, I wouldn't say lower quality, but higher cost of risk. If the process continues and we continue to see this recovery, we expect to see prices on consumer loans to fall as well. And as we pick up in underwriting, the number of young loans that are priced under this environment will be higher than what we have experienced. So the combination of all these will transfer prices as well to the consumers. This is a very long way to tell you that we do expect to see rates impacting in a very favorable way, not only growth but also loan quality.

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Operator   [4]
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 Next question, Nicolas Riva from Citi.

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 Nicolas Riva,  Citigroup Inc, Research Division - Senior Associate   [5]
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 I guess, my question is -- it's a follow-up on the quality question that Gabriel did. And if I look right now at your cost of risk, clearly you're running well above historical average. You already said that next year, you're expecting to see improvement in the economy, and therefore, a decline in cost of risk. However, if I look at your projection for next year, which I believe you said around 2.2%, 2.3% for cost of risk. That's still quite above that historical average of about 10 years of about 1.6%, especially for a bank which is more focused on commercial loans. So my question is, when do you think you can go back to that more normalized historical level for customer expense?

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 Diego Fernando Solano Saravia,  Grupo Aval Acciones Y Valores S.A. - CFO   [6]
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 Nicolas, you're right. We do have a positive bias on the guidance that we gave of 2.25%, but we haven't yet seen some of the facts that we would love to see before we adjust those numbers down. Our main concern of why these numbers shouldn't improve much faster than you would imagine from reverting to historic averages is that GDP is not expected to return to the 4.5% kind of -- 4.5% growth rates that we were accustomed to see. This is a new reality where we might revert to something around a low 3% until a number of things happen in the economy. Under this environment, we prefer to be cautious on our expectations of recovery. We have already seen that happening, but the number where we will stop, we yet need to understand much better. We believe that if 2019 growth starts to pick up or evidence of better growth for 2019 appears, we can become more positive as the year progresses, but you know, we are pretty fact based and we would like to see unemployment figures and other figures also improving. The other event that is built into these numbers is we also have SITP provisions built into our number. As Luis Carlos mentioned, we should be moving up to 50% provisions with the information we have at this point. So we are also cooking that into the number and that's why the number isn't substantially lower.

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Operator   [7]
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 Next question, Jason Mollin from Scotiabank.

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 Jason Barrett Mollin,  Scotiabank Global Banking and Markets, Research Division - MD of LatAm Financial Services   [8]
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 So that -- I mean, you were kind of addressing that question on provisioning, so this includes -- this outlook includes, as you said, cooking in some high provisions. Is that for the full year? Should we be seeing this next year, full year 2018, cooking those in, and if we take that out, what kind of run rate of profitability you're looking for? 13% ROE for next year is still well below where you were operating before this year with the large credit event. So I'm just trying to get a sense of what's behind this limited improvement, but limited improvement in return on equity.

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 Diego Fernando Solano Saravia,  Grupo Aval Acciones Y Valores S.A. - CFO   [9]
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 You're absolutely right. This is the main driver of this guidance. Trying to summarize what Luis Carlos said at the very beginning, we have some things that will not help us that much next year, but there is a few that will be quite positive and that's why we come up with 13% at this point. The negatives are, we see some contraction in net interest margin and then we also see growth, even though picking up from this year not yet up to the point we would like to see it. The positive, though not yet as positive as we would see it, moving further into the cycle, is the cost of risk. We see cost of risk still higher than it should be in the longer term and that's the reason why we brought down our estimate for next year to 13%. In absence of this, we should be getting closer to 14% once these issues are cleared up.

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Operator   [10]
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 Next question, Sebastian Gallego from CrediCorp Capital.

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 Sebastián Gallego,  CrediCorp Capital, Research Division - Analyst of Oil and Gas   [11]
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 Two questions. The first one, regarding your risk appetite going forward, particularly on the commercial front, and more specific, on infrastructure after you commented on the infrastructure law. What's your view after the law was -- is supposed to be passed and the details you mentioned on Ruta del Sol? And my second question is also related but another question regarding Grupo Solarte. They're having some legal investigations going on, on this group, which is also part of 4G concessions. I just want to know if you could share with us the exposure to this group from above and even from the financial system.

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 Diego Fernando Solano Saravia,  Grupo Aval Acciones Y Valores S.A. - CFO   [12]
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 Regarding the risk appetite, on commercial and infrastructure, it continues to be very strong. I think that as we have mentioned over the past few calls, the appetite for infrastructure has been temporarily hindered because of the delay in seeing payment to Ruta del Sol. As Luis Carlos emphasized at the beginning of this conversation, we are very positive on seeing that payment being done even though it's been delayed, and in that sense, we do not see any impact in our middle to long-term appetite for infrastructure. What we expect to see, as I believe is a expected result for this kind of cycle, is a -- the kind of sponsors that will be able to commit to infrastructure projects moving on after the learnings of this year, should be stronger and larger. That's a change in the profile that we expect to see in sponsors, but we continue to expect infrastructure to be a key piece of our portfolio.

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 Luis Carlos Sarmiento Gutiérrez,  Grupo Aval Acciones Y Valores S.A. - President   [13]
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 And regarding your question on Grupo Solarte, couple of things. Number one, as you said, there -- Mr. Solarte and his daughter [apparently] are having some problems with regard to a previous contract that they had in Bogota. I think it's (inaudible) in which they participated with other (inaudible) people and -- but we are not privy to any details, we don't really know what went on there. As you know, Solarte is also a very minority shareholder in Ruta del Sol, and in that capacity, obviously, we're not affected either way by their being -- by the Solarte group being such a minority shareholder in Ruta del Sol. We are -- we do work with the Solarte group as a client and our exposure to that group is a little bit under $50 million and -- but it's fully, fully guaranteed not only in terms of collateral but also in a cash source of repayment. So we are -- the way that we are guaranteeing in those credits almost give us any peace of mind that, number one, the credits that we have granted to Solarte group have nothing to do with the case for which they are being apparently indicted, but we don't know that's going to happen, but apparently so. So the credits that we have to the group are not related to that case. Secondly, he as a minority shareholder in Ruta del Sol, really there is no a problem there. And thirdly, our credits are very well and fully guaranteed. And so we shouldn't have a problem there. We are not counting that as one of our problems. We are, however, very observant of what goes on with the Solarte group.

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Operator   [14]
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 Next question, Cristina Manotas from Davivienda Corredores.

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 Cristina Manotas,    [15]
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 I just have one question. I would like to know what is your perspective about the new [indiscernible] law on financial closures in respect to projects that are [expected] for the next year.

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 Luis Carlos Sarmiento Gutiérrez,  Grupo Aval Acciones Y Valores S.A. - President   [16]
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 Okay, you're referring to the modification of Article 32 of the law of 1508 of 2012, which is what I believe you're referring to. We are very confident that the modification and the way that it was proposed is going to be very beneficial to the 4G projects in terms both of financing being available to them, after, you know, more than -- as well as ourselves there's been a lull in financings and in financial closings of the 4G project. A big reason for that lull is that banks, as you know, we have been included, have stayed out of financings pending the law with the modification to be passed. As we know, the modification passed and the important thing about it is that it clarifies, and more than that, it specifies how to liquidate a concession that is declared null, such as the case of -- or similar to what is happening to Ruta del Sol. The important thing is that banks now know going forward, if a situation like that arises again, now banks will know exactly what money they will get and when they will get it and how it's calculated, and they won't have to go through this, I would call it a torture of what's happened this year and all the situation around trying to decide when this first payment is going to be made and when the rest of the payments are going to be made. So in all, to answer your question, we see very positively the new -- the modification to the law as with respect to Article 32. There are 2 other articles there that we believe are just as important. Number one is, as you know, they have now, by law the documentation required to participate in or to put out a bid will be identical in all cases, and therefore, these are what we call custom bids that have happened in the past will no longer happen. And then thirdly, there is the other article that talks about how banks can step in now in case of a concession being declared null, which is something that is important for banks, because as you know, most of these projects are good projects, are very profitable and banks should not suffer the consequences of the sponsors incurring in some illegal activity as (inaudible) did. So again, just to summarize, we are very happy with what happened. Obviously, as you can see, the law only now only has to be sanctioned by the President. There are still people raising opinions and after the law had passed, both chambers there are still people raising their voices and trying to get the law to change, but we feel that both the Minister of Finance and the President, they're both very intent on getting this law passed, signed, sanctioned and getting it done with and having the financial system again actively participating in 4G.

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Operator   [17]
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 We have no further question at this time. Mr. Sarmiento, do you have any closing remarks?

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 Luis Carlos Sarmiento Gutiérrez,  Grupo Aval Acciones Y Valores S.A. - President   [18]
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 No, I just wanted to thank everybody, as always, for participating in our calls. We're striving to do better, as always. We have a myriad of plans that we will be putting in place to make sure that we do so. And as our quarters go on, we hope to improve every single one versus the previous one. So again, thank you for participating on the call, and we'll see you during the next call.

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Operator   [19]
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 Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.




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